When people get started in the home buying process, they will realize that there are many ways to finance a home. While a select few might be able to buy their home in cash, most people are going to need to take out a loan from a lender, called a mortgage.
These mortgages come in many shapes and forms ranging from fixed-rate mortgages to adjustable-rate mortgages and even balloon mortgages. One of the more eclectic options is called a buy down mortgage.
Those who haven’t heard of this type of mortgage should take a look because buy down mortgages might help to lower someone’s monthly mortgage payment, allowing them to purchase a home at a better price.
An Overview of a Buy Down Mortgage
This type of mortgage technique is used to help a buyer obtain a lower interest rate on their mortgage for the first few years. Some people might have a low credit score or might have other problems getting approved. By helping them lower their interest rate, they might be able to afford a better home.
In this form of mortgage, the person selling the property will make payments for a short time to the lender. Because there are payments going to the lender’s institution, the lender will, in turn, offer to lower the interest rate on the mortgage taken out by the buyer.
As a result, the lender will then lower the interest rate on the loan, which will lower the monthly payment. Typically, the seller will do this for a period of a few years.
As the buyer continues to make payments, he or she will build up equity in the home, which might keep the interest rate low in the future as well.
When are Buy Down Mortgages an Option?
In most situations, this is to the seller’s benefit because they are giving away money to the lender; however, in a buyer’s market, this might be used to help the seller offload their home in a quicker amount of time.
In return for making these payments to the lender institution, the selling price of the home will go up. This helps the seller offset the costs of giving money to the buyer’s lender.
In some situations, this setup might not even involve the seller at all, and the lender agrees to lower the interest rate in exchange for a separate financial arrangement.
In some cases, people even use the buy down as a way to refinance the loan on their home at a lower cost. In general, a buy down mortgage is an unusual arrangement; however, it is important for everyone to explore all of the options available. This will help them obtain the best deal possible.
Explore All Options When Looking for a Mortgage
In order for people to find the deal that is right for them, they need to understand all of the options on the table. One of the options is a buy down mortgage. Buyers should compare this option to the other ones on the table. This will help them make an educated decision during the home buying process.
